Key Emerging Issues in Rural Development Banking and Women’s Financial Inclusion

For decades, a stubborn assumption has shaped rural banking policy: that poor women are too risky to lend to, too dependent on outside help to stand on their own, and too constrained by tradition to do anything beyond a narrow set of “acceptable” economic activities. Each of these assumptions has been steadily dismantled by evidence from the ground. Today, rural development banking sits at a crossroads – grappling with three interconnected challenges that will define whether women’s financial inclusion becomes a lasting transformation or a temporary intervention. Are the rural poor actually bankable? When should NGOs step back? And how far can women’s economic activities diversify? The answers are reshaping how governments, banks, and development agencies think about women, credit, and rural economies.

Are the poor bankable? Challenging a persistent myth 🔗

The idea that poor rural women are too financially unreliable to receive formal credit is not just an outdated prejudice – it has actively blocked millions of women from accessing banking services for decades. Banks historically pointed to low incomes, lack of collateral, and perceived financial illiteracy as reasons to exclude this group. What real-world evidence has consistently shown, however, is that poor women are not just bankable – they are often better borrowers than the institutions that rejected them.

The clearest evidence comes from the IFAD-supported Tejaswini Rural Women’s Empowerment Programme in Maharashtra, India. The programme organized poor rural women across all 34 rural districts of Maharashtra into self-help groups (SHGs). The result? Nearly all participating SHGs accessed formal bank credit and maintained a 99 percent loan repayment rate, with less than 0.5 percent of loans becoming non-performing assets for the banks. For context, commercial banks in many countries would be satisfied with far worse repayment performance from far wealthier borrowers.

This outcome was not accidental. The Tejaswini model worked because it addressed the structural barriers that had blocked women from formal credit – not a lack of repayment capacity. Women lacked collateral, documentation, and proximity to bank branches. Once those barriers were addressed through group-based borrowing and institutional support, their underlying creditworthiness became visible. The Nav Tejaswini programme, the successor initiative launched in 2021 with a total project size of over US$421 million, has continued building on this foundation – targeting one million rural households and facilitating hundreds of millions in bank financing for women-led micro-enterprises.

Why repayment rates are high among poor women 🔗

The high repayment rates among poor rural women are not surprising to researchers who have studied the issue closely. NABARD’s SHG-Bank Linkage Programme, launched in 1992 and now the largest coordinated microfinance initiative in the world, has demonstrated consistently that group-based lending using collective responsibility and social cohesion as substitutes for physical collateral works effectively. The social pressure within a group – where members jointly hold accountability for repayments – is a powerful mechanism that formal banking systems had simply ignored.

There is also a structural reason. Poor women, particularly in rural areas, have fewer alternative credit sources and more to lose from default. Moneylenders charge exorbitant rates; losing access to institutional credit is a far more serious setback for a poor woman than for a wealthier borrower with multiple credit options. This asymmetry makes them, in practice, lower-risk borrowers. Research published in Heliyon (2023) found that SHG-BLP participation significantly shifted rural households to higher levels of financial inclusion compared to non-participant households, with the SHG model reducing both financial exclusion and social exclusion simultaneously.

The question, then, is no longer whether the poor are bankable. It is why mainstream banking systems took so long to recognize it – and what structural reforms are still needed so that poor women do not have to rely solely on specially designed programmes to access what should be standard financial services.

NGO dependency and the path to group autonomy 🔗

Self-help groups do not emerge spontaneously. In the early stages of the SHG movement, NGOs played an essential role – forming groups, training members, facilitating bank linkages, and providing ongoing guidance on financial management, conflict resolution, and enterprise development. Without this scaffolding, most groups would not have survived long enough to become functional financial institutions. The problem is when that scaffolding never comes down.

NABARD’s framework for the SHG-Bank Linkage Programme recognizes three distinct models of SHG promotion. In the most common model, NGOs or other self-help promotion institutions (SHPIs) form, nurture, and support the credit linkage of SHGs with banks. This is not a problem in itself – the issue arises when NGOs remain the decision-making center of a group long after its members have developed the capacity to manage independently. When this happens, the group’s autonomy is stunted. Members may have learned to save and repay loans, but they have not developed the leadership and governance skills needed to run a self-sufficient institution.

The transition from support to self-sufficiency 🔗

The transition from NGO-dependent to self-sufficient SHGs is one of the most critical – and most underemphasized – phases in rural finance. Research from the Indian Council for Research on International Economic Relations (ICRIER) notes that there is a documented tendency for group performance to deteriorate when external support is withdrawn abruptly, but that the solution is not prolonged dependency – it is systematic capacity building that prepares groups for eventual independence.

This involves setting up proper systems for accounts-keeping and auditing, credit management, and leadership development within the group itself. SHG federations – where multiple SHGs are linked into a larger organizational structure at the village, block, or district level – are one mechanism that has proven effective in bridging the gap. Federations provide technical and financial support services to member groups without requiring constant NGO presence. Under the Deendayal Antyodaya Yojana – National Rural Livelihoods Mission (DAY-NRLM), the Indian government has actively promoted this federation model as a way to build second-tier institutions that sustain SHG viability after NGO withdrawal.

The goal, as development practitioners increasingly recognize, is not just financial sustainability – it is institutional self-governance. An SHG that can access bank credit, manage internal lending, resolve disputes among members, and plan its own livelihood activities without external direction has achieved genuine autonomy. This is the benchmark that distinguishes a successful SHG from one that is merely performing well on paper while remaining dependent on a facilitating agency.

The role of NGOs after the transition 🔗

Reducing NGO involvement does not mean NGOs become irrelevant. Their role shifts – from facilitators of group formation to providers of specialized services that groups choose to access on their own terms. Training in new enterprise skills, market linkages, legal assistance, and advocacy are all areas where external expertise remains valuable. Research in the Community Development Journal finds that SHGs and NGOs have successfully empowered women and aided them in venturing into new entrepreneurship and gainful livelihood, but emphasizes that empowerment must be understood as a continuous process – not a destination – in which external constraints are progressively reduced rather than replaced with new forms of dependence.

Diversification of economic activities: expanding what women can do 🔗

The traditional image of an SHG woman is specific: she runs a small weaving or stitching unit, or perhaps a small dairy operation. These activities are not inherently limiting – they can be profitable, scalable, and meaningful. But the assumption that women’s economic roles should be confined to these categories reflects a broader social bias about what kinds of work are “appropriate” for women. Rural development banking is increasingly confronting this assumption directly.

One of the most striking examples of this diversification comes from Uttar Pradesh, where women SHG members have been trained as hand pump mechanics. In rural India, hand pumps are the primary source of drinking water for millions of households, and their maintenance has traditionally been an exclusively male domain. Training women as mechanics broke this occupational boundary in a practical, concrete way. Women who gained this skill did not just earn income – they became service providers for an essential community resource, which fundamentally altered how they were perceived and how they perceived themselves. This example has been cited in development literature on non-traditional skill training as a model for expanding women’s economic roles beyond socially prescribed limits.

What diversification requires 🔗

Expanding SHG activities into non-traditional areas does not happen automatically. It requires deliberate intervention at multiple levels. At the policy level, it means designing skill-training programmes that are not constrained by assumptions about gender-appropriate work. Uttar Pradesh’s Mahila Samarthya Yojana, for example, aims to connect women’s SHGs with markets and institutional credit while providing free skill-development workshops – recognizing that finance alone is insufficient without the skills to deploy it in new sectors.

At the community level, it requires addressing the social norms that define which occupations are available to women. This is often harder than providing training or credit. Women mechanics, electricians, or computer technicians may face resistance from family members or communities who view these roles as inappropriate. NGOs and SHG federations have found that peer support within groups is one of the most effective tools for navigating this resistance – when one woman in a group successfully enters a non-traditional occupation, it becomes easier for others to follow.

At the institutional level, banks and microfinance providers need to design products that support diversified livelihoods – not just the narrow range of activities that credit officers are familiar with. NABARD’s Livelihood and Enterprise Development Programmes (LEDPs) represent one attempt at this – providing grant support for skill upgradation, demonstration units, and critical infrastructure across a wide range of agricultural, allied, and rural off-farm activities. The explicit recognition that SHG members can and should be supported to diversify into any viable livelihood activity is itself a significant shift from earlier, narrower programme designs.

From micro-enterprise to market participation 🔗

The economic potential of diversified SHG activities becomes clearest when groups move beyond subsistence-level enterprise into actual market participation. The IFAD-supported Tejaswini programme demonstrated this: 80 percent of poor women graduates moved from subsistence farming to becoming small agricultural business owners. The successor Nav Tejaswini initiative goes further, explicitly targeting the development of competitive enterprises – with women understanding balance sheets, cash flow, and financial management in ways that previous generations could not have accessed.

This matters for rural development banking because it reframes what SHG credit is actually for. When credit is used only for basic consumption smoothing or subsistence-level activities, repayment is possible but growth is limited. When credit is linked to diversified, higher-value activities – whether technical services like hand pump repair, processing units, or market-connected enterprises – the economic impact per loan grows substantially. The World Bank’s work with India’s National Rural Livelihood Mission has shown that training women as banking correspondents (Bank Sakhis) – another thoroughly non-traditional role – resulted in women serving the most vulnerable segments of rural communities, improving loan repayment rates, and building their own entrepreneurial confidence simultaneously.

The interconnected nature of these challenges 🔗

These three issues – bankability, NGO dependency, and diversification – are not separate problems. They are dimensions of the same underlying question: on whose terms does women’s financial inclusion happen? If banks define “bankable” in ways that systematically exclude poor women, they will remain outside formal credit. If NGOs build groups that cannot function independently, the women within them remain dependent on external actors. If economic activities remain confined to a narrow, gender-prescribed range, women’s earning potential is artificially limited regardless of how much credit they can access.

What the evidence from India’s SHG movement, IFAD’s programmes, and grassroots experiments like women hand pump mechanics demonstrates is that all three of these constraints can be overcome – but only when development banking addresses the structural conditions that create them, rather than treating them as natural features of rural women’s lives. As the Community Development Journal notes, SHG-BLP is not a restricted model but a flexible and comprehensive tool that can be directed toward multiple development goals – a recognition that is pushing rural banking to expand its conception of what women can achieve when given genuine institutional support.

What do you think? Given that poor rural women have consistently demonstrated high loan repayment rates, what do you think is the most significant structural barrier still preventing their full integration into mainstream banking – and who bears responsibility for removing it? And as SHGs move toward greater autonomy, how should the relationship between NGOs and women’s groups be restructured so that support doesn’t become a new form of dependency?

References

1. https://www.ifad.org/en/w/projects/1100001314
2. https://www.ifad.org/en/web/latest/news-detail/asset/41820176
3. https://www.ifad.org/en/w/news/ifad-and-govt.-of-maharashtra-join-hands-to-empower-1-million-rural-women
4. https://www.nabard.org/contentsearch.aspx?AID=225&Key=shg+bank+linkage+programme
5. https://pmc.ncbi.nlm.nih.gov/articles/PMC10238733/
6. https://icrier.org/pdf/22dec/ramanathan_issuespaper.pdf
7. https://www.gktoday.in/shg-bank-linkage-programme/
8. https://academic.oup.com/cdj/article/58/2/283/6374653
9. https://organiser.org/2025/07/24/304311/bharat/nari-shakti-drive-in-uttar-pradesh-eight-transformative-schemes-for-women/
10. https://www.ifad.org/en/w/news/on-international-women-day-ifad-boosts-commitment-to-empower-1-million-rural-women
11. https://blogs.worldbank.org/en/endpovertyinsouthasia/enabling-digital-financial-inclusion-rural-women-emerging-findings-india